Unit 6:Finance quiz #1
Amortized loans are paid off over time by making regular payments to principal and interest. All of the following statements regarding amortized loans are true, EXCEPT:
A borrower will pay the same amount of principal on all payments in a properly amortized loan In a fixed mortgage, the payment remains level over the loan term.
The Truth in Lending Act / Regulation Z permits a three business day right of rescission for all of the following loans, EXCEPT:
A first mortgage There is no right of rescission for a first mortgage, but a borrower has the right to rescind refinances, home equity loans, and reverse mortgages.
Which of the following best describes the practical effect of an alienation clause in a deed of trust?
A subsequent buyer may not assume the loan An alienation/due on sale clause requires the loan to be paid in full if the property is sold or transferred. This would not permit the loan to be assumed. FHA and VA loans cannot contain an alienation/due on sale clause. A loan would have to be non-negotiable to prevent the loan from being sold. A lien allows a lender to sue to recover some or all money lent to satisfy a debt. This is explained in the power of sale clause in a title theory state. The defeasance clause outlines that the lender must return the title granted under the deed of trust once final payment has been received.
A loan that is interest-only may be referred to as:
A term loan An interest-only loan may be referred to as a term loan. A bridge loan is temporary financing that allows a borrower to purchase a new home with the plan to pay off the loan once the old home sells. A variable-rate or adjustable-rate mortgage lets the interest rate rise or fall depending upon changes in an index. A blanket loan finances multiple homes or lots.
A borrower recently borrowed $200,000 from a lender by way of a straight term loan. Which of the following is most accurate regarding the loan?
A term loan will include, at some point, a balloon payment toward the principal. A straight term loan is interest-only for the entire term of the loan. The borrower will pay the entire principal balance at the end since the loan does not amortize. The loan may be at a variable or fixed rate.
A borrower obtains a 30-year fixed mortgage with a monthly payment of $1,200. All of the following statements are true regarding financing, EXCEPT:
Additional payments that are made on an amortized loan will result in a reduction in the monthly loan payment for the remaining term of the loan When a borrower makes additional payments on the loan, it will reduce the principal balance and reduce the number of remaining payments (decreasing the loan term). It does not impact the dollar amount of future payments.
Which of the following statements regarding adjustable-rate mortgages is NOT true?
Adjustable-rate mortgages generally include a cap on the interest rate, but never contain a cap on the payment Adjustable-rate mortgages may contain interest rate caps and payment caps. The payment caps can cause negative amortization.
A recent foreclosure sale, called by the first mortgagee, produced a total sale price of $180,000. After paying $10,000 for the cost of sale, the following liens were remaining: tax lien of $6,000, a first mortgage of $160,000, and a home equity line of credit with a balance of $20,000. Which of the following statements is TRUE?
All liens will be cleared from the title to the property. When a property is sold at foreclosure for less than the balance owed, the remaining liens will be cleared from the property. Liens are paid in the order of recordation, except for real property taxes and public assessments, which have the highest priority, or a mechanics lien that can jump in priority over other recorded liens (not taxes/assessments and will not always have a higher priority). The statutory right of redemption allows the borrower a 10-day redemption period.
A borrower with a large down payment, greater than 20%, and excellent credit score, over 800, would likely choose which of the following options to purchase a $350,000 residence?
An uninsured conventional loan A well-qualified buyer with excellent credit and a large down payment would typically choose an uninsured conventional loan. Private mortgage insurance is required when a conventional buyer lacks a 20% down payment. The government insures FHA loans.
In regard to required disclosures under the Truth in Lending Simplification Reform Act, all of the following would be considered finance charges, EXCEPT:
Attorney fees Finance charges include prepaid interest (discount points), loan fees (origination), mortgage insurance, application/commitment fee, credit report fee, flood certification, IRS fee, tax service fee, and appraisal fees. The closing attorney fee is part of closing costs and not finance charges.
A developer has obtained financing for a new subdivision with 100 salable lots. When a buyer purchases a property, a portion of the proceeds will be paid to the lender to remove the lien they have on that lot. What type of loan does the developer have?
Blanket A blanket loan allows the borrower/mortgagor to finance multiple lots under one loan. The agreement outlines how much must be paid to remove the lien against each individual property is sold. A construction loan is the riskiest form of financing, which is often temporary. Permanent financing obtained when construction is completed is known as a take-out commitment. A package loan is used to finance both real and personal property.
Which of the following best describes a borrower obtaining a loan where the payment includes principal, interest, taxes, and insurance?
Budget Loan A lender prefers a budget mortgage as real property taxes have a higher priority over other liens, and the collateral for the loan is protected when it is insured. A fully amortizing loan means that the loan will have a zero balance at the end of the loan repayment term. A package loan includes both real and personal property. A growing equity loan provides for increases in the mortgage payment so that the borrower rapidly pays down the principal borrowed.
What is the term for a type of financing where the seller agrees to hold legal title until the final payment is received?
Contract for Deed Contract for deed or installment land contract is a type of seller financing that favors the seller
A borrower purchased a property 25 years ago and has just made the final payment on the loan under a title theory state. Which of the following clauses is triggered?
Defeasance The lender must return the rights conveyed by the deed of trust once the borrower/mortgagor has made the final payment. The borrower has "defeated" the mortgage triggering the defeasance clause. The due on sale/alienation clause requires the loan to be paid in full when ownership is transferred. The acceleration clause is triggered when the borrower defaults on the mortgage and the lender calls the entire balance due and payable. Subrogation is the signing away the right to sue
According to the guidance contained in TILA-RESPA which of the following cost would not be allowed to change on the final closing disclosure from the loan estimate?
Discount points
Which of the following statements is NOT correct regarding equity?
Equity is the difference between the home's current value and its purchase price Equity is the difference between the fair market value of the property and the amount owed. Equity increases when additional payments are made towards principal or when the fair market value of the property increases. When additional debt is taken against a property it decreases the equity.
All of the following statements regarding VA loans are true, EXCEPT:
For a buyer to assume a veterans loan they must have an entitlement VA loans are assumable by veterans and non-veterans regardless of entitlement.
All of the following statements regarding VA loans are true, EXCEPT:
For a buyer to assume a veterans loan they must have an entitlement VA loans are assumable by veterans and non-veterans regardless of entitlement. When a veteran with an entitlement assumes a VA mortgage from another veteran, the mortgagor veteran that originally borrowed the money will have his/her entitlement restored. When a non-veteran assumes the mortgage, it must be paid in full before restoring the veteran's entitlement. A qualifying unremarried widow or widower may obtain a VA loan. A veteran can only have one VA loan at a time.
Which statement is FALSE regarding a promissory note?
It must be recorded under the Connor Act to be enforceable The promissory note is not recorded, but the deed of trust or mortgage would be. The promissory note outlines the repayment terms. The mortgage or deed of trust provides security for the loan. NOTE: It is vital to know the difference between a mortgage (security instrument) and a promissory note (IOU). The Connor Act requires certain real estate documents to be recorded to be binding against third parties.
Kyle and Trina, a recently married couple, are purchasing a property located in a title theory state. Kyle and Trina will take the title as tenancy by the entirety, but only Trina will be signing the mortgage note. Which of the following statements is FALSE?
Kyle and Trina must both sign the promissory note for it to be valid. One spouse can purchase the property, qualifying for the mortgage, and only that spouse would be required to sign the promissory note. In a title theory state, the married couple would need to sign the deed of trust for it to be enforceable
The practice of secondary mortgage markets institutions FNMA and Freddie Mac purchasing a package of mortgage-backed securities to spread risks across a multitude of loans is referred to as:
Loan pooling Mortgage pooling or loan pooling occurs when large amounts of loans are bundled into a mortgage-backed security and sold.
A buyer wants to purchase a property for $250,000 by taking a conventional mortgage with an 85% LTV, 4.5% interest, and 25 year repayment period. The loan amortizes at 5.561. Property taxes and insurance are anticipated to cost $3,480. The borrower has the following monthly debt obligations: student loan $100, car payment $350, credit card debt $200, and an installment loan with 5 monthly payments remaining of $175. Does the buyer qualify for the loan if she makes $75,000 per year?
No. She qualifies for housing but not total debt ratios. Only long-term debts need to be included so a debt that has 5 payments remaining is short-term and does not need to be included. The minimum income is the higher of the two amounts. Monthly Income: $75,000 / 12 = $6,250. Max Housing: $6,250 X 28% = $1,750. Max. Total Debt: $6,250 X 36% = $2,250. Buyer qualifies for both housing and total debt ratios. Loan amount: $250,000 X 85% = $212,500. Principal and Interest Payment: $212,500 / 1,000 X 5.561 = $1,181.71. Monthly Tax and Insurance: $3,450 / 12 = $290. Housing Payment: $1,181.71 + $290 = $1,471.71. Total Debt Payment: $1,471.71 + $100 + $350 + $200 = $2,121.71
Jeffrey obtains an FHA 203b loan for $180,000 from Shady Tree Bank for 30 years with the payment of 1% origination and 2 discount points. Jeffery would be considered which party in this transaction?
Obligor The obligor/promisor/mortgagor/borrower borrows money from the bank and signs a note agreeing to the terms. The obligee/promisee/mortgagee/lender will have the buyer sign a mortgage or deed of trust (security interest) to protect the collateral. The way to remember this is that the borrower has "or's" and the lender has "ee's". A court appoints an administrator for an estate when a person dies intestate (without a will). The lender/mortgagee may be referred to as a beneficiary in a title theory state, where the title to the property is held by a trustee until final payment is received.
Which of the clause in the deed of trust describes the process by which the property will be sold upon the beneficiary's request, for non-payment?
Power of sale clause The power of sale clause grants the lender/beneficiary to request the property to be sold at auction when a borrower has failed to make payments
Regulation Z would NOT apply to which of the following purchases assuming that the buyer sought financing?
Purchase of a 5-unit owner-occupied property Regulation Z applies to consumer financing. A 5-unit property would be considered commercial property and therefore would be exempt from advertising disclosures
Which of the following transactions would be required to comply with the Real Estate Settlement Procedures Act
Purchase of a triplex with partial seller financing RESPA applies to consumer transactions. The purchase of a farm over 25 acres, a building with more than four units, and an office building would be considered commercial transactions. Seller financing is exempt in most situations; however, the answer states only partial seller financing is obtained.
Which loan is restricted to borrowers that are 62 or older and does not require monthly payments?
Reverse Mortgage A reverse mortgage permits a borrower that is 62 or older to access the equity in a home without requiring monthly payments. The balance accumulates until the borrower dies and the heirs can pay back the loan or sell the house. A bridge loan is short-term financing that allows a borrower to purchase a new home before their current home sells. A blanket loan finances multiple properties or lots. A contract for deed or installment land contract is a form of seller financing where the title transfers after the vendee makes the final payment.
Which loan is restricted to borrowers that are 62 or older and does not require monthly payments?
Reverse mortgage A reverse mortgage permits a borrower that is 62 or older to access the equity in a home without requiring monthly payments. The balance accumulates until the borrower dies and the heirs can pay back the loan or sell the house. A bridge loan is short-term financing that allows a borrower to purchase a new home before their current home sells. A blanket loan finances multiple properties or lots. A contract for deed or installment land contract is a form of seller financing where the title transfers after the vendee makes the final payment.
A mortgagor refinances their first mortgage, however since the second mortgage is near maturity, elects to continue to pay the second note as agreed. The new lender wants to be the superior lien over the second mortgage. What will the second lender do to accomplish this?
Subordination Subordination is trading places that allow a higher priority lender to change to a lower position. Subrogation occurs when a party signs over the right to sue, which occurs when an insurance company pays a claim and then will seek recovery from the party at fault. Hypothecation is pledging an asset as security, allowing the borrower to use the property while payments are made. Novation allows a new party to take over a debt through assumption, releasing the original debtor.
Ben is building a home and closing on a construction loan with HCC Bank. The lender will be providing temporary financing, thus requiring Ben to refinance into a more permanent loan. Which of the following best describes the new loan?
Take Out Commitment A take-out commitment relates to new construction property and is permanent financing once the home has been completed. Construction loans are typically interest-only, and temporary financing is used while the property is built. When a loan does not fully amortize, the final payment is a balloon payment. A wraparound mortgage does not disturb initial financing. A second loan is obtained, and the borrower will make one payment that pays both loans.
Which of the following functions should a real estate agent NOT perform for a seller in a short sale?
The agent may negotiate with the lender on behalf of the seller to minimize the potential deficiency judgments. A broker cannot negotiate with a lender on behalf of a seller client. The seller would need to hire an attorney.
Which of the following statements is FALSE regarding the Real Estate Settlement Procedures Act?
The buyer's agent is not permitted to pay a referral to another agent unless the agent resides out of state RESPA does not apply to agent commission or the payment of referral fees. It does not permit kickbacks among settlement service providers. The way to recall what RESPA applies to is KEUBDL - (Kids Eat Up Boogers Dirt and Lead). K - no kickbacks, E - escrow limits, U - uniform settlement statement, B - booklet amount financing, D - disclosure of loan servicing and L - loan estimate within 3 days of mortgage application.
A buyer asks her agent to explain the basic elements of the various types of loans that are available. Which of the following statements would NOT be true?
The government will insure a conventional loan when the borrower makes less than a 20% down payment. The government does not insure or guarantee conventional mortgages. When a borrower does not have 20% to put down on the home purchase, the lender will require the borrower to pay for private mortgage insurance (PMI). The name says it all; it is private. VA loans are guaranteed, according to a sliding scale. Only a veteran with an entitlement or qualifying unremarried widow or widower is permitted to originate a VA loan. The bank determines the interest rate and fees for both FHA and VA, although banks can only charge up to 1% origination. FHA and VA loans cannot charge a prepayment penalty. Private loans of $150,000 or less are not allowed to charge a prepayment penalty.
A married couple is interested in purchasing a new home in a title theory state. The wife is a nurse, earns $80,000 per year, and has excellent credit. The husband is a school teacher, earning $40,000 per year, and has a bankruptcy on his credit report from a failed investment property. Which of the following statements is MOST accurate?
The lender may use the wife's income only for the loan but require both parties to sign the deed of trust. A lender may allow a married couple to purchase a home using only one spouse's credit history and income. Since the property is located in a title theory state, both spouses will need to sign the deed of trust.
In a short sale, which of the following is FALSE?
The lien-holders are prohibited from collecting deficiency judgments if they approve the short sale A lender that agrees to a short sale may still sue the borrower for a deficiency judgment. A deficiency judgment is the difference between the sale of the home and the balance owed to the bank.
A borrower conveys bare legal title to a third party in the deed of trust. Which of the following best describes the trustee's interest in the property?
The trustee has a legal title but no right to possession The trustee does not have the power of possession unless they successfully foreclose and are the winning bidder at the foreclosure auction. Hypothecation is pledging an asset as security for debt while still maintaining possession. The trustee holds legal or actual title until the borrower pays off the full debt, not the lender/beneficiary.
The vendee dies with only five months remaining on the installment land contract. Which of the following is TRUE?
The vendor may take the property back without paying money to the vendee's heirs if the heirs refuse to pay the remaining months. An installment land contract or contract for deed is a form of seller financing where the title to the property transfers to the vendee upon final payment. If the vendee dies, the contract is "binding" on the heirs. The heirs may choose to perform or default. When a vendee defaults, the vendor regains the property and is not required to refund any money to the vendee or vendee's heirs. NOTE: Purchase contracts do not automatically terminate upon death.
Which of the following best describes the purpose of paying discount points to a lender?
They reduce the monthly payment for the borrower.
Which of the following best describes the purpose of paying discount points to a lender?
They reduce the monthly payment for the borrower. Discount points reduce the stated interest rate on the note and lower the monthly payment to the borrower. It is prepaid interest and a sunk cost that may be charged on conventional, FHA, and VA loans. Discount points increase the yield on the loan.
A builder applies for a construction loan to erect a single-family home for the purpose of resale. All of the following statements are true regarding the loan, EXCEPT:
To receive future draws against the credit line, the builder need only to show proof of expenditures A builder needs to reach milestones to receive additional funds. Construction loans are very risky, so banks will release draws to the builder's performance. Most construction loans provide temporary financing, with the borrower needing to obtain a "take out commitment," which is permanent financing.
A seller provides a purchase money mortgage to a buyer as the sole method of financing. The buyer lives in the property for 5 years before defaulting on the mortgage. Which of the following statements would NOT be true?
Upon foreclosure and sale, the seller can sue the buyer for a deficiency judgment if the recovered proceeds will not satisfy the debt and foreclosure fees.
A seller lends 90% of the purchase price to the buyer. The buyer signs a mortgage note and a deed of trust. This is an example of:
a purchase money mortgage. Seller financing is often referred to as a purchase money mortgage. Conventional financing typically requires strong credit, a large down payment (often 20%), and may require private mortgage insurance. A reverse mortgage is limited to borrowers that are 62+, where the bank lends money but does not require repayment until the borrower dies. A contract for deed or installment land contract is a form of seller financing where the title to the property conveys after final payment.
An underwriter may take into consideration all of the following factors when evaluating a borrower, EXCEPT:
age of applicant. Under the Equal Credit Opportunity Act, a lender cannot discriminate based on Federal Fair Housing's protected classes and the additional protections for age, marital status, and income from public assistance
The loan to value ratio is determined by:
dividing the mortgage amount by the purchase price.
The loan to value ratio is determined by:
dividing the mortgage amount by the purchase price. Loan to value is calculated by taking the mortgage and dividing it by the purchase price. LTV decreases as the down payment increases. The VA loan has the highest loan to value as the borrower can obtain 100% financing, thus having 100% loan to value. When borrowers obtain a conventional mortgage with a 20% down payment, they will have an 80% LTV.
A borrower obtains a 30-year fixed mortgage by signing a note and deed of trust. The borrower has possession of the property while making payments to the bank. This is known as:
hypothecation. Hypothecation occurs when a property is pledged as security for a debt and the borrower retains the use of the asset. Squatter's rights allow a path of ownership or possession of a property after someone unlawfully occupies for a time defined by law.
Foreclosures in North Carolina would best be described as:
nonjudicial foreclosure. In a title theory state, foreclosure is nonjudicial, may be referred to as a foreclosure by advertisement, and requires the property to be sold at auction. Judicial foreclosure occurs in lien theory states that require the lender to sue for a judgment. Deed in lieu of foreclosure is a "friendly foreclosure" where the lender agrees to take the property back without going through the foreclosure process/expense. Strict foreclosure occurs when the courts give the borrower a set period to pay back the lender, and if they fail, the mortgagor/borrower will automatically lose the property.
The primary purpose of the secondary mortgage market is best described as:
providing liquidity for the primary through the purchase of mortgage-backed securities. The secondary market purchases mortgages so that the primary market can continue to make loans. Lenders have a limited amount of money to lend and need to sell mortgages refill their "bucket."
Brandon purchased a home by obtaining a VA loan 5 years ago. Due to an economic setback, Brandon is significantly behind on the mortgage. The lender has tried multiple workouts, but Brandon continues to breach the agreement. The lender has now sued Brandon to obtain a judgment. Based on the above, Brandon has:
purchased the property in a lien theory state When a lender must sue before foreclosing on a property, the property was purchased in a lien theory state. In a title theory state the mortgagor/borrower grants the mortgagee/lender a deed of trust securing the debt to the home. It is faster to foreclose in a title theory state. The alienation/due on sale clause requires the mortgagor/borrower to pay off the loan when ownership has been transferred to another party, which means that the loan is not assumable. Hypothecation occurs when an asset is pledged as collateral for a debt, and the borrower has possession of the asset while repaying the debt.
All of the following are characteristics of VA loans, EXCEPT:
the VA guarantees the full loan amount in the event of default. The VA does guarantee the lender against loss, but it is according to a sliding scale.
When a borrower obtains a VA loan:
the bank originates the loan and the government guarantees it.
All of the following are characteristics of an FHA 203b loan, EXCEPT:
the borrower can be charged loan origination, discount points, and prepayment penalties FHA loans cannot contain a prepayment penalty. FHA loans are also assumable by qualified borrowers.
A borrower obtains financing in a lien theory state by signing a note and mortgage. The lender may be referred to as:
the mortgagee. The lender may be referred to as the mortgagee, promisee, or obligee (lender has ee's). The borrower may be referred to as the mortgagor, promisor, or obligor (borrower has or's). The trustee holds title in a title theory state, where the borrower signed a deed of trust. The lender in a title theory state could be referred to as the beneficiary. Courts appoint an administrator for an estate when someone dies without a will.